When trading contracts for commodities, financial instruments or the like at an exchange in is quite common that the parties involved in the trade want to trade a number of different contracts all at the same time. Such an order involving a number of simultaneous trades of different products usually is given the precondition that the combined price for all the different subcontracts is equal or better than a predetermined price.
An order involving a number of different simultaneous trades of contracts is usually referred to as a combination order or a combination contract order. For example, a person may wish to buy 7 contracts A and sell 6 contracts B and not pay more than $100 for the whole combination contract. The amount that the person pays or receives when a combination order is traded is referred to the net price of the combination order.
Furthermore, when a combination contract (or a number of them) is to be executed at a given net price, it is often necessary to determine the price for each product/sub-contract of the combination order. The price for each sub-contract, sometimes referred to as a“leg,” must be set so that when executing all the legs of a combination contract, the total price of all legs will equal the net price of the combination.
However, the prices for the sub-contracts can not be set arbitrarily. The reason for this is the price structure of most existing exchanges. The price for a given contract is generally traded at a discrete price. In other words, the contract price has to be at a valid price tick, i.e. an integer times the tick size. Also, there is a restriction that the net price has to be a valid price tick. For each product at each particular time, there will also be a valid “interval” corresponding to the price gap between the best selling price and best buying price (bid/ask), which is termed the “spread.”
When trading combination contracts, it is always desired and in some cases required that the price for each sub-contract/leg be within the spread at the time when the combination order is traded.
However, today there exist no way of ensuring that all legs are traded within the spread for each product traded in the combination contract. The problem arises from the fact that the sub-contracts are all traded at discrete prices. Thus, the prices for the individual legs in some cases are hard to find regardless of which multipliers the legs in the combination have, regardless of the different spreads, regardless of the tick size, regardless of the combination quantity, and regardless of the net price at which the combination order is matched.
An additional problem relates to the calculations carried out in an automated exchange system when trying to determine the prices for the individual legs. Such calculations using a conventional algorithm are extensive, and use much processor power. Even then, conventional calculations still may fail to deliver prices for the individual legs that are within the spread. The practical result is to let one or more of the legs be traded at a price outside the current spread or to reject the combination order.
Hence, there is a need to find a way to ensure that all combination orders can be traded regardless of which multipliers the legs in the combination contract have, regardless of the different spreads, regardless of the tick size, regardless of the combination quantity and regardless of the net price. The solution should preferably also reduce the processor load.